Should You Buy Qihoo 360? 3 Pros, 3 Cons

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Qihoo 360 Technology Co Ltd (NYSE:QIHU), which is a China-based software developer, took a hit yesterday. On news of Qihoo 360’s recent earnings report, QIHU stock plunged nearly 9% to $53.59. Keep in mind that this is only the latest of the travails for shareholders. Less than a year ago, QIHU stock was trading over $100 per share.

Qihoo 360 NYSE:QIHUYet, in the quarter, Qihoo 360 did beat the Street forecast. Sales spiked by 45% to $384.4 million, and the adjusted earnings came to 57 cents per share. As for the consensus estimate, it called for revenues of $378.1 million and earnings of 49 cents per share.

The guidance was also fine. For Q2, QIHU expects revenues to range between $435 million to $445 million, which is in line with the Street forecast of $437.2 million.

Then again, investors were apparently hoping for even more momentum. So, given the drop in QIHU stock, perhaps now is an opportunity?

Well, to see, let’s consider three pros and three cons of QIHU stock:

QIHU Stock Pros

Internet and Mobile Power. Over the years, QIHU has built leadership positions in key markets, such as for Internet, mobile security, mobile gaming and browsers.

The main driver is the security business. Interestingly enough, Qihoo 360’s strategy has been to provide its offering for free.  As a result, QIHU has created a dominant platform that has led to monetization of value-add software and services.

For example, the Internet adverting segment has been particularly strong. In Q1, QIHU stock revenues spiked by 75.1% to $245.3 million. A nice catalyst was the search business, in which Qihoo 360 continues to place major investments. To this end,Qihoo 360 recently launched an independent search brand, called HaoSou, which has gotten initial traction.

Mobile. For the most part, QIHU is a PC-centric operation. And it is still growing at a nice pace. During Q1, the total monthly active users count came to 503 million, up from 479 million in March 2014.

But of course, the real opportunity is with mobile. For this category, Qihoo 360 has certainly been making solid progress. There are now 778 million smartphone users, which is up from 538 million in March 2014, for QIHU’s flagship security solution. What’s more — QIHU is also the top Google Inc (NASDAQ:GOOG) Android store operator in China.

Just like with the PC business, Qihoo 360 is in a nice position to convert this user base over to value-ad products, which should help keep up the growth ramp.

Valuation. With the slide in the stock price, QIHU stock’s valuation is definitely much more attractive now. After all, the forward price-to-earnings ratio is only 11, which is especially cheap given that Qihoo 360 is likely to grow at a double-digit pace for some time.

To put things in perspective, Baidu Inc (ADR)’s (NASDAQ:BIDU) multiple is 27 times, Sohu.com Inc’s (NASDAQ:SOHU) is 67 times and Weibo Corp (ADR)’s (NASDAQ:WB) is 26 times.

QIHU Stock Cons

Competitive Markets. A major part of QIHU is its mobile gaming business, which unsurprisingly leads to volatile revenues. Let’s face it, gamers can be extremely fickle. For example, in Q1 the mobile gaming revenues for QIHU were up only 7.1% and down 20.1% quarter over quarter.

At the same time, Qihoo 360’s move into search could have limits as well. The top player, Baidu, has an entrenched position and powerful brand. Additionally, other rivals are making bids for the category, such as Alibaba Group Holding Ltd’s (NYSE:BABA) Shenma and Sohu.com Inc’s Sogou, which has the mighty Tencent Holdings ADR (OTCMKTS:TCEHY) as a partner.

Macro Problems. China’s economy may be huge, but signs of trouble exist. The International Monetary Fund is forecasting a deceleration in 2015 of 6.8% in GDP, down from 7.4% for last year. The Chinese government has slackened monetary policy to improve the situation — but the efforts have proven ineffective so far.

If the slowdown continues, it could weigh on QHOO stock because advertising spending is an easy item to cutback on, and QHOO gets 54.4% of overall revenues from advertisers.

Smartphones. QIHU may be setting itself up for another big problem — that is, with its entry into the smartphone market. True, QIHU is partnering with another firm, Coolpad Group Ltd (OTCMKTS:CHWTF), which should lessen the risk. Although, Qihoo 360 still invested a hefty $409.1 million for a 45% stake in the joint venture.

What’s more, the Chinese handset market involves fierce rivals like Apple Inc. (NASDAQ:AAPL) and Xiaomi. Rising above the noise to offer customers something that is unique will certainly be tough.

Verdict on QIHU Stock

Qihoo 360 definitely has serious challenges. There is no guarantee that its mobile security platform will allow for strong monetization. Besides, QIHU must compete against mega operators in markets for search and smartphones.

Despite all this, Qihoo 360 has a built a nice mobile user base and continues to hold onto the PC segment. More importantly, QIHU stock continues to grow at a strong pace, with Q2 forecasted at 37% to 40%.

So, should you buy QIHU stock?

I think so — especially given the reasonable valuation.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2015/05/qihu-stock-qihoo-360/.

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